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A Bipartisan Way to Cut Medicare Costs

August 14, 2009

Donald H. Taylor, Jr.

Medicare is the federal health insurance plan that covers persons age 65 and over. The plan is primarily tax financed, but beneficiaries pay premiums, co-pays and deductibles. Some have private insurance that covers out-of-pocket costs. Medicare also insures persons who are permanently disabled and those with end-stage renal disease, regardless of age. Medicare pays private doctors and hospitals for the care of 45 million Americans.

The cost of Medicare has risen rapidly since 1965 as new technology has been developed, resulting in improved health for beneficiaries. The rate of cost growth in Medicare has been less than that for private health insurance, but projected costs are unsustainable and will contribute greatly to future deficits if nothing is done.

Medicare is expensive because of the people it covers: very ill disabled persons and the elderly. Medicare pays for the health care of 8 in 10 Americans who die each year. Costs are extremely high just before death, and our health-care system is set up to try everything because of many factors, including financial incentives for providers and patient preferences. As I tell my students, Medicare is the Godfather when it comes to setting payment rates (I have an offer you can't refuse), but like my grandmother serving lunch when it comes to deciding what care a patient can receive (Whatever you would like, dear).

One in four Medicare dollars (about $120 billion this year) is spent on care that occurs during the last year of life. This was true in the 1970s when we spent 8 percent of GDP on health care, and it is true today, when we spend 16 percent. The persistence of this proportion and other evidence suggest that some care is futile and neither extends nor improves quality of life. However, reducing such care is difficult because it is not clear when the last year of life begins, until it ends.

The hospice benefit has been shown to reduce costs while improving quality of life for the 4 in 10 Medicare decedents who choose it, but savings are modest ($2,300 per patient, or 6 percent of last year of life costs), and hospice is not appropriate for all patients. A more comprehensive means of slowing Medicare cost growth is needed.

The Patients' Choice Act, which has bipartisan support, has the best chance of reducing Medicare costs. Co-sponsored by Republican Sens. Tom Coburn of Oklahoma and Richard Burr of North Carolina, the act calls for the development of a Health Services Commission to "enhance the quality, appropriateness, and effectiveness of health-care services through the publication and enforcement of quality and price information." President Barack Obama recently raised the possibility of creating an Independent Medicare Advisory Commission that would have a similar goal of improving care in a way that would reduce Medicare cost inflation.

The idea is to have experts develop comprehensive proposals that improve the quality and efficiency of care in a way that insulates the process from Congress. Congress could vote up or down on an annual set of proposals, in a manner similar to the base closing commission.

Recent Medicare policy has focused on cutting payment rates to providers (doctors and hospitals), an approach that can slow spending somewhat, but it also can be an incentive for providers to do more to make up for lower fees. Medicare's 20-year experimentation with private HMOs has shown that the healthiest beneficiaries choose such plans, and this approach has not saved money.

A more comprehensive look at what Medicare covers, when and how it is paid for is needed. Both leading Republicans and the president have shown interest in this approach, and certainly membership on such a panel could be bipartisan. The Republican bill suggests the president would nominate members and the Senate would confirm them.

Our nation spends a great deal on research, and we should use it -- applied by experts and not politicians-- to improve Medicare. Lessons could be adapted in the rest of the system, keeping to the American tradition of incremental changes.

Any change brings risks and uncertainties. But the risks to our current economy, and to my children who will have to deal with the deficits we are producing, make doing nothing to rein in Medicare cost growth even riskier.

Donald H. Taylor Jr. is an assistant professor of public policy. His blog www.donaldhtaylorjr.blogspot.com is available for discussion of this article and health care reform in general. This article was first published in The (Raleigh) News & Observer on August 14, 2009. This is part of a weekly series of articles by Donald Taylor exploring aspects of the health care reform issue.